TechTarget's chief content officer Kelley Damore recently met with Janelle Teng, vice president of Bessemer Venture Partners, to discuss how the pandemic changed venture capital investing and how CIOs can take a VC-approach to investing in new technology. They also touched upon emerging topics including generative AI and environmental, social and governance.
How do you think the pandemic has changed venture capital (VC) investing, the approach, or even the types of companies venture capitalists are investing in?
Janelle Teng: At Bessemer, I am very much focused on enterprise software and cloud infrastructure. I think the pandemic has been a tremendous trigger for a lot of enterprises to adopt such technology. It's actually a bit more of a tailwind than a headwind, unlike other industries.
And what do I mean by that? Satya Nadella, the CEO of Microsoft, made a comment very early in 2020 that enterprises are seeing two years of digital transformation in just two months, because the pandemic did force organizations to embrace cloud technologies as their workforces had to move remote. They had to manage a distributed workforce, they had to include new processes and move to the cloud. In many ways, I think the pandemic has been a great tailwind for adoption of SaaS technologies and cloud infrastructure.
Have there been any technologies that fared better with regard to the pandemic?
Teng: Remote work tools. We saw a lot of video conferencing technologies get adopted and are now mainstays in enterprise workflows. Anything that helped supercharge productivity of employees in a remote setting saw increased cloud adoption. And as folks started moving more to the cloud, we also saw tailwinds benefiting categories such as data infrastructure, where now more organizations have opportunity to move their data into the cloud, or adopt new infrastructure to support their new cloud software, as well as cybersecurity, which very much impacts the day-to-day operations of some of these companies. It's just table stakes to have good cybersecurity software.
How did your organization personally manage hybrid? How challenging was it for you to do your due diligence with Zoom and not be able to meet in person?
Teng: As a venture capitalist, and especially at Bessemer, we are long-term partners to many of our founders. We like to joke that over Zoom, it can feel like a shotgun marriage sometimes and then you are paired with an entrepreneur for years, if not decades, building that company together.
For us it was very important to be able to still make in-person connections, not just from a diligence perspective, but also from a relationship-building perspective. We actually prioritized that. If we were unable to make it out to the site for due diligence or get particular data or meet an entrepreneur in person, I think we veered on the side of saying, 'you know, let's wait till the pandemic is over, we have an opportunity to meet in person before continuing to build the relationship.' I think that was very aligned with our philosophy to prioritize that in-person or that interaction that was beyond, you know, meeting someone as a square in the Zoom link or over video conference.
I would like to talk about a pullback with regard to tech spend. What do you think you've learned from the pandemic that is carrying you forward to this possible recession?
Teng: I would say it's twofold. For companies dealing with challenging economic conditions -- whether it is a pandemic that forces your workforce to move remote, or currently a high-inflation environment, cloud infrastructure and software can actually serve as a very powerful deflationary force to automate core business processes, improve employee productivity and reduce spending on labor expenses. It really allows enterprises to become more cost efficient. This is why I believe that cloud growth is actually more resilient than other industries through both bull markets as well as recessionary periods. We started to notice that the current macroeconomic conditions [are] causing companies to reevaluate their software spend and optimize cost savings compounded with that SaaS usage explosion during the pandemic. A lot of economic pressures are driving companies to take stock in the visibility into managing their software costs and risk.
And it may seem very counterintuitive, but in the past year, we've seen a lot of companies adopt software to help them manage their software expenditures. For example, we've seen companies from within our portfolio as well as outside our portfolio use solutions from companies to negotiate lower prices for software purchases, helping them manage their vendors, as well as have more visibility into their software spend, and away from the application layer on the cloud infrastructure layer. We've also seen the acceleration and adoption of cloud cost management tools. Cloud financial operations tools really help organizations monitor how much of the cloud they're using and what they're using the cloud for.
Interesting as some of the cloud startup vendors have taken a little bit of a beating. Is your perspective that there's a lot of opportunity out there and there's actually more pros than there are downsides?
Teng: Yes, and I would say what's so interesting [is that] even in a downturn, the cloud industry and outlook actually still remain remarkably resilient. Despite the market reset, especially compared to other industries, some of the largest cloud providers and SaaS vendors are still exhibiting unprecedented growth, but also strong profitability.
Janelle TengVice president of Bessemer Venture Partners
There's several drivers of this. We talked a bit about how we're certainly in the early innings of cloud adoption, and how the pandemic has helped accelerate that. I read recently [that] Gartner predicts by 2025, 51% of addressable enterprise IT software spending will shift to the cloud. This was accelerated again by pandemic tailwinds. And McKinsey recently published a report about the applicability of cloud across nearly every sector in every geography and actually made a specific call to action for Fortune 500 companies to adopt cloud in order to unlock over a trillion dollars of value.
And what we see within the specific cloud companies is that these tailwinds are so powerful that some of the best cloud companies are not just growing at unprecedented rates, they've accelerated [this growth] in current conditions. HubSpot, a cloud CRM company focused on marketing and sales, is an example. They are growing faster today at $2 billion [effective annual rate (EAR)] than they were at a billion EAR. I think software, and cloud in particular [has] greenfield opportunities and cloud adoption. But it's also just a very powerful deflationary force, which helps companies stay resilient during challenging times such as these.
During the pandemic there was digital transformation acceleration. What you're saying is during a potential recession, there is still a lot of opportunity to grow? What are the right technologies and the right frame of mind to get through it?
Teng: In specific verticals like cybersecurity and data infrastructure, where budget has remained resilient, because these are sort of table-stakes software that you need to run your enterprises on. They have been resilient, not just in terms of budget cuts, but CIOs are still actively investing in new projects in this space. What we have noticed is that as CIOs are more thoughtful about their investment span, and are also trying to consolidate vendors, there is rebounding happening. Who benefits in the cloud world really are the vendors that have a platform offering and are able to offer a more comprehensive suite of products to serve the same customer and different teams within an organization, rather than just simple point solutions. I think this is a trend that has been changing a lot of purchasing behavior. It has influenced our own investment thesis and also influenced the product strategy that we're giving to many of our portfolio companies.
We had a CIO Advisory Board meeting a couple months ago, and we asked them where they got their information. Their answer was CIO peers if they're working on a particular project, but the other place they go is to the VC community. I wanted to get your take on what CIOs can learn from VCs in terms of looking at technology and prioritizing technology. Both VCs and CIOs get a huge influx of pitches. How do you really dig through that and figure out what makes sense for your organizations?
Teng: I would say CIOs have a dual mandate. I think a lot of people just think CIOs are there to invest in projects that keep the lights on, but CIOs play such an important role in investing in new strategic projects that can drive competitive advantage for their companies. I think this dual mandate is very interesting and very aligned with what we do as VCs, right? We are investing in the next frontier of technology. I would advise CIOs to not just look for projects that keep the lights on like cybersecurity and data infrastructure. [Rather] have your pulse on what are some new emerging technologies that cannot just drive bottom-line value, but top-line value to your companies and be the next frontier of competitive advantage. CIOs play such an influential role in understanding what's new in the market, what new technologies can be adopted and guaranteeing the resiliency of their organizations.
CIOs should be talking to customers, because they need to understand the products and services that they could potentially support, or how they're boosting efficiency. How important is it for you to be talking to customers? Sometimes there's a criticism about the VC community that investments are pie in the sky. What are your thoughts on that?
Teng: I would say talking to customers is a cornerstone of our diligence process here at Bessemer. We trust that actions speak louder than words. Seeing actual behavior from customers is something that we take into account. This doesn't even need to be a paying enterprise customer. We care a lot about product metrics and usage as well. What is the individual end user doing? And we look at different aspects within customer behavior as well as user behavior -- things like adoption. How is your company getting awareness of [their] product? How are they converting that into paid customers? Those are metrics we care about. We very much care about engagement: How and when is your customer interacting with your product? How often and what are they doing? What features do they like? All of these are leading indicators as opposed to lagging indicators. More engaged customers lead to stickier customers and higher retention and higher upsells. It also leads to them becoming champions and advocating for your product organically.
Another aspect we look at is in customer retention and user retention. And that isn't just from a financial perspective, where we look at net dollar retention or gross logo retention. We also care about your users being retained. Do they log back in after seven days, do they log out after 30 days? We find those to be very strong leading indicators. Of course, the ultimate goal is having the customers be advocates and champions for you. A lot of the best software companies leverage their customers as such a valuable resource to evangelize their product to other customers, to the community, to the VCs, to really educate the whole industry. Those are the sort of areas that we pay very close attention to. I think the customer voice is key and certainly part of our diligence process [in order to] make sure we get that granular viewpoint.
You mentioned advocates, and sometimes when I think about an advocate, I think about the channel community. I almost view them as super users because they see a lot of different implementations and are advocates for technologies that they pick up and resell. Some of the companies that you oversee -- Clarity, Databook and Netlify -- have partner programs. When you look at companies moving beyond Series B funding, is it important to have a channel as part of their growth plan?
Teng: [After] two decades of cloud investing, we found building partnerships to really be a tried-and-true strategy to help cloud companies scale their business to that $1 billion mark. Series B companies [and] even public companies really are leveraging channel and partnerships to scale their platform. Channels are so important in so many ways. Product partnerships are important. If you're integrated with others in the system, it makes it more seamless for your own product to be adopted. Incorporating partnerships and integrations into product roadmaps are table stakes now for many of our startups who are trying to build market share. They are trying to partner with public larger cloud companies to grow together. Partnerships are also very important for go to market. We argue that pairing yourself with a strong go-to-market channel partner can make or break your sales and marketing efficiency and strategy. Many of our data infrastructure companies that have partnerships with large cloud providers are able to scale efficiently because they're leveraging the larger organizations to build their brand to sell to similar customer profiles. From a go-to-market perspective, it is extremely important.
Third, from an ecosystem perspective, having a marketplace has been a tried-and-true lever that many of our companies, for instance Shopify, has deployed very successfully to help them grow into their next chapter and as a new sort of frontier for product innovation. Partnerships are important for any startup that is thinking of scaling to that $1 billion mark. We encourage folks to really explore, even if it's one type of partnership. Experiment and see what works for you because it can be a powerful lever.
I'd love to now switch to technologies and emerging technologies. What are you seeing in terms of new and interesting applications, new emerging technologies that CIOs should be mindful of and thinking about?
Teng: It's something we think about every day as VCs. My colleagues and I recently published a roadmap detailing how this year has been a breakout year for generative AI, especially in terms of enterprises. What is generative AI? Generative artificial intelligence really refers to machine learning algorithms, or large language models that can use existing content that's available, such as text, audio, video files or code, to create new original content. The core idea is that this artificial intelligence can generate completely original artifacts that would look like a human had created it. Imagine you can tell the generative AI [tool] to write me an email in a humorous tone or create a car design in this [particular] artistic style. AI could generate these prototypes on your behalf. Why are we so excited about generative AI? Generative AI really represents the next leap forward in the original golden promise of technology, which is to make life easier and save humans time by automating work. What should be most exciting to CIOs about this technology is that with generative AI, machines are not just performing low-skill manual automation, like data transfer, but they're helping to enhance creative skills like writing, coding, design. In fact, we're so bullish about this space that earlier this year, our team invested in Jasper, which is an AI content platform for text and art. Several of our portfolio companies, such as Canva, have also begun incorporating generative AI features into their platform. We believe that this space is not just a technology shift in the enterprise, but so foundational that it will become embedded in our lives. We are very excited about this space and would encourage CIOs to check out the myriad of startups that are building generative AI products.
Generative AI is getting a lot of buzz lately. Is there a worry when you're looking at organizations about intellectual property? Taking original art, for instance, and changing it without artists giving consent or getting any credit or royalties.
Teng: Yes [and as an example] there are students even using generative AI to write papers or plagiarize. I do think with every new frontier of technology, there needs to be thoughtful use and governance. Governance can come in the form of actual regulation in this space. I do think generative AI will usher in fundamental changes to how things are licensed [and] how regulation works around copywriting. I do think we will see a shift there. At the same time, I think, it's also incumbent upon end users and organizations to set guidelines or rules for how these technologies are used in their organizations. This is not anything new. With every new frontier of technology -- whether it was social media, internet, mobile -- there needs to be guidelines in place. Technology comes first and as we've seen in different waves, there will be more regulation and more governance and guidelines and thoughtful use to come. I'm looking forward to next year where we'll probably see fundamental shifts and more dialogue around that space.
How about any new or interesting applications for some of the emerging technology such as climate tech or healthcare or verticals that are taking advantage of emerging tech?
Teng: Yeah, we do have a frontier practice that has been actively investing in sort of the next frontier of climate tech. I think climate tech is having a renaissance moment. I think a lot of it too, was driven by the pandemic with the adoption of new cloud technologies. I think there's a baseline layer set of embracing new software. We're even seeing more traditional companies, farming and agriculture, and commodities also embrace some of these technologies. It's not just a hardware or frontier tech conversation. But I think we've also started to see a proliferation and renaissance period for software within some of these companies. I spend most of my time in enterprise software in cloud, so I'm less familiar with the frontier tech space. But our team has certainly been very active in recent months, even with the downturn, and it speaks to the massive opportunity there to apply new technologies, not just to climate, but also to traditional technology, traditional areas that are looking to enhance their offerings in hardware as well as software.
Another area is ESG and sustainability. We have some research which shows CIOs find it an important purchasing consideration. Have you seen the same thing?
Teng: Yes, I think we are entering an age of thoughtful consumers and buyers. It's not just about the return on investment or value propositions that resonate. [It isn't] just about cost savings or driving top-line revenue, or employee productivity. I think they recognize that there is a wider vision, there are wider considerations and how we've seen it, at least, is in software. About a year ago, we wrote a prediction that many more companies are adopting software that helps them to take into account and put DE&I at the forefront of their organizations. There are many successful startups that have been helping companies achieve that vision. I think we are entering that age where CIOs are certainly more thoughtful. And as for our companies, it is important to articulate different value propositions beyond the cost savings or the ROI but articulate some of these other ESG considerations.